Confronting the retirement savings problem: Redesigning the saver’s credit

Increasing saving for retirement is one of the most important challenges the United States, similarly to many other Western governments, faces: the aging population could render public retirement and pension funds insolvent in the not-so-distant future. The problem of insufficient retirement savings is especially acute among low-income earners. The main policy tool the United States employs in order to enhance retirement savings of low-income earners is the Saver’s Credit, which provides a nonrefundable tax credit to low-income earners that save for retirement. Although the federal government has been willing to provide billions of dollars’ worth of credits to potential recipients, studies have demonstrated that the actual impact of the credit is fairly limited due to its low take-up rate. The surprising inefficacy of the credit has intrigued scholars, who have attempted to provide explanations for its failure. This Article identifies a central weakness of the Saver’s Credit that has not received sufficient attention: the exceptionally high value of the loss of liquidity to low-income earners as a consequence of the sanction on early withdrawals. The high value such earners attribute to the liquidity lost as a result of their participation in the scheme deters them from participating. While the loss of liquidity seems an inherent feature of any scheme incentivizing retirement savings, this Article offers an alternative version of the credit that can overcome these caveats: the Saver’s Continuous Credit. The Saver’s Continuous Credit is based on an ex ante Pigovian subsidy regime-one that provides a benefit for retirement savings without sanctioning early withdrawals. An ex ante regime subsidizes actions that have increased the expectancy of generating a public good, even if that public good is not ultimately produced. This Article examines the general features of the ex ante Pigovian subsidy regime, which is relevant to a wide set of legal fields. This Article also analyzes other economic and behavioral advantages of the Saver’s Continuous Credit.